Business (and the way in which we go about business) is undergoing fundamental change. Many traditional methods for business growth no longer work as effectively. Thanks to the internet and other market forces, buyer behaviour has also changed beyond all recognition. The rules of the game have changed, and even the playing field has changed shape.
Standing still or just tweaking around the edges in an effort to improve results is dangerous, as competitors are finding ways to step around those businesses that are less effective with their changes.
Working harder or longer hours in an effort to improve results is not only stressful, it is dangerous to your businesses health and yours.
So, how do you grow a business in today’s economic climate – particularly one that is at the end of its natural growth cycle?
Many advisers recommend that a business consider the following basic ways to grow its profits:
- Increase prices
- Sell more volume
- Cut costs
Others might advise a business on improving its business systems or increasing efficiencies.
While all of this advice is correct, I’ve found that these strategies all assume that the underlying industry and economic cycle is just that; cyclical. Unfortunately we now live in a fundamentally different economic landscape; the winds are unpredictable and unreliable and, for most private businesses, these strategies alone will not yield positive results quickly enough to keep the business afloat. These tactics will not satisfy the business owner’s needs, nor do they address the fundamentals of a sustainable growth model.
So, how do we proceed in unfriendly winds and uncharted territory, without working harder?
One way is to apply some of the principles that many successful companies are applying. One of those strategies is growth through strategic acquisition, in other words, buying a motor and bolt it on. Although not always front of mind for business owners, business acquisitions can represent a viable strategy. If done right, such a strategy can offer the acquiring business important potential synergies, valuable earnings enhancements and tremendous opportunities for superior long-term growth as well as significant increases in business value and personal wealth.
You do need to be mindful of the strength of your management team; ensure you have an A Grade team to assist you with your growth and share the work load. (Have a read of my article under Leadership Management and cutting out the cancer in your business).
In my book ‘Crank It UP’ I outline how to help you avoid the frustration of reverting to the old, organic methods of growing your business. I know when you are trying to turn your business around and inject real growth it can feel like you are banging your head against the wall. The book offers a proven alternative method to get results back into your business.
What’s Possible with Acquisitions
In my opinion, with an open and entrepreneurial mindset, a $5 million business can become a $10 million, then a $15 million business with accompanying strong profits in a relatively short period of time, with the right strategies and with the right structures in place.
When larger companies sell, they generate a higher multiple of their profits. So the goal by undertaking these acquisitions is both to increase the profitability on a year-on-year basis to improve cash flow, and to increase the overall value of the business when it sells. For example, a company with $10 million worth of sales and $1 million of EBITDA (earnings before interest, tax, depreciation and amortisation) may be worth a three times multiple (i.e. 3 x $1 million EBITDA being $3 million sale value).
When this same company undertakes just two medium-size acquisitions each of, say, $3 million in sales with $300,000 EBITDA, and pays a multiple of 2.5 (so $750,000 each, being $1.5 million in total), the company will now have an EBITDA of $1.6 million (it’s original EBITDA of $1 million, plus the total EBITDA of the acquisitions, which was $600,000). And that’s without adding other synergistic benefits! As a result, the company could expect to get a multiple of its EBITDA of up to 4 times creating $6.4 million in value, when previously the business was valued at just $3 million.
The combined cost to achieve this result was $1.5 million. In this instance the net increase in value after the cost of the acquisitions has been $1.9 million extra value in the business. The leverage factor is impressive to say the least.
The reason the business now has a value based on a multiple of four, or possibly even more, is because as businesses grow larger and more stable they become more attractive to private equity firms , small public companies and overseas purchasers as targets. Not only are these sized companies willing buyers, but they have a history of paying higher multiples for target companies that are in the right sector and at the right size. Many public companies are actually valued on the stock market multiples above 8 to 10 and in many cases much higher.
In addition to the numbers, other benefits of strategic acquisitions include:
- Creating greater economies of scale quickly by absorbing other businesses
- Considerably improving profits, cash flow and business value
- Adding stimulus and interest to your business
- Diversifying the business into higher growth sectors/products
- Introducing the business to new geographic markets
- Creating a broader customer network to sell associated products
- Taking out a competitor before someone else buys them
- Attracting top quality executives (who can assist in running the business, and working towards an eventual sale or exit)
My book ‘Crank It UP’ will demonstrate via case studies not just how this is possible, but also how other business owners have already used an ongoing acquisition strategy to grow profitably and create much higher levels of personal wealth than previously.
About the Author: Warren Otter
Warren Otter assists medium-size business owners with their growth and lifestyle ambitions. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.
He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.
At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.
Also, have a look at the other articles on this site. Best of luck in running your business